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Banks tighten lending criteria

In the wake of the Global Financial Crisis, local banks found it harder to access credit from overseas money markets and reacted by tightening lending criteria.

Many institutions focused on higher loan-to-valuation ratios (LVRs), and cracked down on the low-doc and no-doc loans, which in the United States for a varied number of reasons (not just because they had little documentation associated with them) had contributed to the GFC.

As a result, Australian banks had the pick of the crop when it came to lending money to homebuyers. Those with a higher deposit, a solid work history, stable income and a capacity to repay the loan were more attractive as potential customers.

As access to global funding is still under pressure, banks are still being very selective in who they lend to and, in fact, many have further tightened access to funds for investors.

In March, the country’s biggest home loan lender, the Commonwealth Bank, wrote to mortgage brokers advising them that LVRs will be reduced to 80 per cent from 90 per cent on a range of investment home loans for borrowers looking to withdraw cash to fund investments such as shares (not property).

The tighter standards made it harder for borrowers to obtain loans to fund home purchases for “personal investment” purposes. Instead of having to stump up a cash deposit of 10 per cent under the previous arrangements, borrowers affected by the new lending criteria will be required to commit a deposit of 20 per cent. Many of the larger lenders also followed suit.

And recent research conducted by online comparison site www.RateCity.com.au shows most of Australia’s lenders show no signs of easing lending criteria to first homebuyers. The research found a continuing decline in the number of home loans with a high LVR of 95 percent or above.

There were 31 less such loans available in May 2010 compared to February 2010 (1,079 loans in May versus 1,110 in February). Conversely, LVR loans of 80 percent (requiring much higher deposits) saw an increase of 25 to 149 loans in May compared to September 2009.

Damian Smith, RateCity’s CEO, said tighter lending criteria is making it tougher for first homebuyers.

“Australia’s average house price is at a six-year high according to Australian Property Monitors at $542,827. Even at constant LVRs, the size of a deposit therefore keeps rising, and the tighter average LVRs we’re seeing in the market only exacerbate this challenge,” said Mr Smith.

However, Aussie broker Lindsay Rogers said many lenders will negotiate on LVRs, as well as fees and rates – provided a strong case is made.

“In general, banks are being very cautious and at times, are cherry-picking the best customers, but it doesn’t mean they are not willing to negotiate,” he said.

“It’s worth speaking to a broker and getting them to help you put your best foot forward by building the strongest possible case for funding.”

Tips for securing a home loan

Shop around. Talk to a broker and get them to do the legwork for you. Aussie brokers have access to hundreds of loans from 16 lenders and can research the best products for your circumstance in minutes.

Try and save at least 20 per cent of the purchase price. Even if your LVR comes in higher, you need to factor in other costs such as stamp duty, legal fees, removal costs and new furniture.

Make a budget. Estimate how much of your income you need to repay your mortgage and factor in what those payments would be if interest rates went up by at least two per cent. Try and stay at under 30 per cent of your income for mortgage repayments.

Pay off any outstanding debts such as credit cards, personal loans etc.

Check your credit rating. You may have a black mark on your credit without even knowing it. Late payments of utilities or other loans may adversely affect your credit rating. Check your credit history and score for free by visiting Credit Savvy.

About Jim Rice

Jim hails from California but now calls Sydney's Inner West his home. He is passionate about learning and teaching both digital technology and personal finance. In his spare time you'll find him either chasing his daughter around town or in the surf.

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